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Auditor Guidelines on Business Travel and Meal Per Diems after Rev. Rul. 2006-56

By David O’Driscoll, J.D., LL.M.

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An IRS
examination memorandum provides guidelines to examiners auditing
excess per-diem payments in light of Rev. Rul. 2006-56. The issue
involves taxpayers who pay reimbursement allowances to employees
for travel expenses in an amount exceeding the Federal per-diem
rate, without treating such excess amounts as wages for employment
tax purposes.

Payments for employee business travel and
meal expenses under an accountable plan are treated as nontaxable
expense reimbursements. In contrast, payments under a
nonaccountable plan are wages that must be reported on Form W-2
and are subject to employment taxes and withholding. If the facts
and circumstances evidence a pattern of abuse of Sec. 62(c),
including the rule to treat excess allowances as wages, all
payments under the arrangement are treated as wages; see Regs.
Sec. 1.62-2(k).

Rev. Rul. 2006-56

Rev. Rul.
2006-56 provides guidance as to the proper employment tax
treatment of expense allowance payments when an employer fails to
treat amounts exceeding the Federal per-diem rate as wages. The
ruling holds that a taxpayer’s failure to track excess allowances
and its routine payment of excess allowances not treated as wages
evidences a pattern of abuse and causes all payments made under
the expense allow-ance arrangement to be treated as made under a
nonaccountable plan.

Pre-2007 Payments

The ruling
was effective Nov. 13, 2006. However, most taxpayers not currently
in compliance as to the treatment of excess per-diem payments will
need time to update or purchase accounting software enabling them
to compute the proper amount of additional wages. So, for tax
periods ending before 2007, absent egregious circumstances or
evidence of intentional noncompliance, the examiner should not
treat a plan as entirely nonaccountable solely because excess
per-diem payments were not treated as wages. Instead, only the
excess amounts over the Federal per-diem limit should be treated
as wages.

Periods after 2006

For periods ending
after 2006, the examiner will determine whether the plan is
abusive, based on (1) the extent of the excess payments not
treated as wages and (2) whether a system for tracking excess
payments is used. The examiner should apply the following
criteria:

When does an employer routinely
make payments in excess of the deemed substantiated amount?
The agent should apply the criteria in IRS Legal Enforcement
Manual (LEM) 4.23.5. If the LEM criteria are not met, excess
payments will not be a pattern of abuse, absent other
significant plan defects.

When
does an employer fail to track excess allowances? If the
criteria in LEM 4.23.5 are satisfied, the agent must determine
whether the employer uses a system to track allowances that
permits it to determine when the allowances paid to its
employees (computed on a per-diem basis) exceed the deemed
substantiated amount, and to treat such amounts as wages. If
the employer uses such a system, the fact that the employer,
due to errors in its system, routinely pays excess allowances
that it does not treat as wages generally does not, on its
own, evidence a pattern of abuse. Each case stands on its own
facts and circumstances.

If a
plan evidences a pattern of abuse, all of the per-diem
payments made under the plan will be treated as taxable
wages.

If a plan does not evidence
a pattern of abuse, but an employer has paid excess allowances
without treating them as wages, only the excess per-diem
payments will be considered taxable wages.

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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